You will agree with the following:
Trading a volatile market is a hard nut to crack especially if you are new to this whole online trading thing. Not knowing where the market will head next is a tough position to be.
But what if there was a way to know how volatile a market is and at the same time know a bulletproof direction of the asset you are trading; wouldn’t it be a fun way to trade?
Well, with Bollinger bands you can capture both volatility of a market and see a trend reversal strength.
In today’s post, we discuss just that – how to rake profits using Bollinger bands on IQ Option.
This is the same tool used by the pros to trade volatile markets.
Having said that, let’s look at the definition of terms on Bollinger bands for better understanding.
What are the Bollinger bands?
Bollinger bands are registered trademarks of John Bollinger and are among the best technical indicators available on the IQ Option trading platform today.
They are used to predict future movements of the market based on the past data, and the results drawn on your trading charts.
Based on this, it is safe to say that Bollinger bands are moving averages and accompanying bands.
That’s where this indicator gets its ‘bands’ name. It’s comprised of 3 lines namely:
- An upper line (band)– this line is derived from adding a moving average and standard deviation and multiplying the total by a factor, commonly two
- A middle line – this is the mainline and it is a moving average, mostly SMA10 or EMA
- A lower line (band) – this line is as a result of moving average minus the standard deviation multiplied by value, mostly two.
You can now understand why it is called Bollinger Bands.
At the same time, the middle line acts as the center of the bands and determines what you as the trader pick up as signals.
This is what I mean.
The upper line is two standard deviations away from the middle line, so is the lower line.
simply put, as the price experiences higher volatility, the bands will move further away from the moving average (middle line).
To put it differently:
The bigger the standard deviation, the wider the price range of the instrument at the specified period.
I know this may not make much sense as of now. But later, it will especially since this act of paying attention to how far the instrument price moves in relation to its average comes in handy when trying to predict future price movements.
How do Bollinger bands work?
Bollinger bands work in an assumption that when the price levels rise or drop too much, at some point, they must bounce back.
To grasp this idea, I will illustrate using two examples:
- If an apple is priced at $1 for a moment and then it shoots to $2 hence becoming more expensive. On seeing this, people will start buying fewer apples, consequently driving the price back to $1 to increase demand again.
- If an apple previously sold at $1 falls to a cheaper price, more and more people will rush trying to purchase it. The increase in demand will drive the price back to $1 if the supply is overwhelmed by demand.
As you can see, these examples don’t claim that the price of an apple will remain constant. Prices do change – slowly and after some time.
However, whenever there are rapid price changes, it’s normally short-lived. Based on this fact, market psychology calls for gradual price changes, unless there is a catastrophic occurrence.
Bollinger bands reflect this assumption.
Here’s how it does that:
You see the middle moving average line; it creates the long-term price change, while the upper and lower creates a channel where the price can fluctuate.
- When the market price approaches the upper band, traders soon realize that the instrument is trading higher than it should, therefore react on impulse to start selling more of the asset at play. This happens because like in the apple example, traders expect a price reversal.
- Whenever the market approaches the lower line, the traders will soon realize that the instrument is trading lower than its value. And hence buying more of the same, leading to increased demand followed by prices moving back closer to the middle line.
In a nutshell, Bollinger bands give you a unique opportunity to understand the prevailing market psychology without having to talk to other IQ Option traders.
With that said, let’s look at how to set up Bollinger bands on IQ Option
How to set up Bollinger bands in IQ Option.
Login to your IQ Option Account.
Register here if you don’t already have an account.
- Click on indicators feature located on the bottom left corner of your screen.
- Click on Volatility and then choose Bollinger bands from the list of indicators.
- Next is tweaking settings. Click on Setup & Apply tab on the Bollinger bands’ window. Then set the period to 20 and click on Apply to add the indicator onto your IQ Option trading chart
The tool is ready for use.
How to use Bollinger bands to trade on IQ Option
As a rule of thumb, Bollinger bands indicator works best when you are placing short-term trades.
Using the chart below as an example:
- Whenever you see the prices touching either the bottom of the top bands and start falling, it’s a signal for you to enter a short-sell position.
- If the price approaches either the top or bottom band, then starts climbing, you should enter a short buy trade
Other Bollinger bands special features you should know.
Bollinger bands breakout is when the price leaves strays away from the centerline (the normal price range) crossing out of the bands (up or down).
It is worth noting that approximately 90% of the price movements happen in between the price bands. Only 10% of these events take place near the ‘normal’ price range and hence branded breakouts.
Additionally, breakouts are not tradable signals simply because they do not provide any information at all on the magnitude of the future trend.
The squeeze is when the price bands come closer together.
As such, they depict low market volatility and hence impending high volatility in the days to come.
However, just like Bollinger breakouts, the squeeze doesn’t provide information on when the volatility could hit. As a result, most IQ Option traders do nothing during the squeeze as it also signifies low volatility.
Combining Bollinger Bands with other tools.
Bollinger bands may be the best indicator to trade volatile markets. But it is not a universal tool. Mr. Bollinger, the inventor of this awesome tool, understood this fact.
According to him, the Bollinger bands should be used alongside other indicators to reap maximum benefits.
Back to you now.
Also Read: – How to Place Your First Trade On IQ Option.